Chuck Robbins got his tenure as CEO of Cisco Systems (NASDAQ:CSCO) off to a good start by delivering earnings ahead of analyst estimates. While all eyes will be on the new management in the coming quarters to see any restructuring of Cisco's portfolio, the immediate focus is on how its businesses are performing right now. With this in mind, let's take a closer look at the key numbers in the earnings report.
Cisco beats estimates
The headline numbers:
- Fourth-quarter revenue of $12.84 billion beat analyst estimates of $12.65 billion.
- Fourth-quarter non-GAAP EPS of $0.59 beat analyst estimates of $0.56.
And the guidance:
- First-quarter 2016 revenue guidance for 2% to 4% growth equates to around $12.49 billion to $12.73 billion, compared with analyst estimates of $12.55.
- First-quarter 2016 non-GAAP EPS guidance is set for a range of $0.55 to $0.57, compared with analyst estimates of $0.56.
While fourth-quarter revenue and EPS were ahead of estimates, the first-quarter guidance is pretty much in line with analyst estimates -- although it's no surprise to see a new CEO being a little cautious with guidance.
Management highlights deferred revenue
I can't help thinking that the real story here is on the balance sheet, in terms of Cisco's growth in deferred revenue. Don't get flustered by the accounting jargon: Deferred revenue is simply an advance payment for a product or service that hasn't been delivered or rendered yet, so it isn't recognized as revenue on the income statement until it's delivered. Instead, it sits on the balance sheet as a liability. However, strong growth in deferred revenue implies strong future revenue growth.
Here's how Robbins put it on the earnings release: "I'm particularly pleased with the strong growth in deferred revenue, which shows we are very effectively driving our business to a more predictable software-based model, at the same time as growing revenues and earnings."
When technology companies shift toward a "software-based model," it usually suggests that deferred revenue should start to increase, as software tends to be sold more on a recurring basis (particularly if it's a cloud-based subscription) rather than hardware products, which tend to more one-off based sales.
As you can see in the following chart, the 7.4% year-on-year increase in total deferred revenue in the quarter is impressive. It will be interesting to see if analysts upgrade their forecasts in the coming days in order to reflect the increase in deferred revenue.
As ever with Cisco, it's important to look at its sales by products and services. Its core Switching and NGN Routing businesses represented 46% of revenue in 2015, with Services representing 23%. None of the other business you'll see in the following chart contributed more than 8% to revenue in 2015.
This chart shows the year-on-year growth in revenue for each business.
For the full year, Switching revenue grew 5%, but NGN Routing grew only 1%. Nevertheless, both reported growth in the fourth quarter that was within the 2%-4% range management is forecasting for overall revenue growth in the first quarter of 2016. Moreover, the growth rate in services increased to 3.8% in the fourth quarter, from 3.2% in the third quarter.
Non-core activities such as Data Center, Wireless, and Security all generated double-digit growth for the full year, although all of them reported lower year-on-year growth in the fourth quarter than they did for the full year, implying that their growth is slowing.
All told, it was a positive report, but the good news related more to the potential for future growth than to any upgrade to near-term forecasts. After all, Cisco's first-quarter guidance is largely in line with expectations. However, don't be surprised if some analysts upgrade forecasts for 2016.
Turning to more granular detail, the core businesses (Switching, NGN Routing, and Services) all grew in the 2%-4% range that most analysts have Cisco's total revenue growing at in the next couple of years. Meanwhile, the mixed performance in non-core activities (particularly weakness in Service Provider Video) suggests that Robbins may do well to restructure Cisco Systems in the future. All eyes are on the new CEO.